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04/24/87 Williston Basin Interstate v. Federal Energy Regulatory

April 24, 1987





Petition for Review of an Order of the Federal Energy Regulatory Commission


Opinion for the Court filed by Circuit Judge D. H. GINSBURG.

D. H. GINSBURG, Circuit Judge: In Orders No. 3381 and 338-A,2 the Federal Energy Regulatory Commission ("FERC" or the "Commission") designated four natural gas formations as "tight formations," thereby qualifying their output for higher, so-called "incentive" prices under section 107(c)(5) of the Natural Gas Policy Act of 1978 .3 ARCO Oil and Gas Co. owns the gas rights to these formations, and has contracted to sell the gas to Montana-Dakota Utilities Co. ,4 which under the sales contract, must pay an incentive price if the gas qualifies for such pricing. MDU opposed ARCO's application to FERC for "tight formation" designations, and now appeals the two orders, seeking their reversal.

MDU raises two principal grounds for reversal. First, MDU contends that it was arbitrary and capricious for FERC to rely on its own previous Order No. 99,5 which established generic criteria for determining whether to grant "tight formation" designations in particular cases, despite evidence that the tight formation program was having unintended and undesirable consequences.6 MDU renews the argument which FERC rejected in Order No. 338-A that the agency must abandon the use of the Order No. 99 generic criteria and make case-by-case determinations of when incentive prices are necessary, in keeping with its statutory duty to permit incentive pricing only when "necessary to provide reasonable incentives for . . . production."7 Second, MDU argues that even if FERC could properly rely on the criteria set out in Order No. 99, its conclusion that these four formations satisfied those criteria was arbitrary and capricious because FERC relied upon misleading data and used flawed methodologies in analyzing them.

We do not reach either of MDU's arguments, however, because we lack jurisdiction of MDU's petition to review FERC's orders, as explained below. I.

Responding to a 1977 presidential report indicating that regulation under the Natural Gas Act of 19388 had resulted in underpricing, excess demand, and insufficient supplies of natural gas, Congress passed the NGPA in order to bring natural gas prices closer to the price of fuel substitutes. The NGPA provided for substantial deregulation of natural gas prices by 1985, after a transitional period intended to encourage production from new sources.

In order to encourage development of sources considered unprofitable at the existing price ceiling, the NGPA authorized sellers of certain types of gas to charge higher incentive prices; the eligible categories are "new natural gas,"9 "Outer Continental Shelf gas,"10 gas from a "new, onshore production well,"11 "stripper well natural gas,"12 and "high-cost natural gas."13 The NGPA specifies the generic criteria defining each of these categories except for "high-cost natural gas," which is described as including gas from certain specified types of sources ("geopressured brine," "coal seams," and "Devonian shale"),14 as well as gas "produced under such other conditions as the Commission determines to present extraordinary risks or costs." NGPA ยง 107 (c) (5).15 The Conference Report states that FERC might include within the high-cost gas category "natural gas produced from tight formations with little permeability, including Western tight sand formations . . . ."16 Since section 107(b) authorizes FERC to set a higher price only "to the extent that such special price is necessary to provide reasonable incentives for the production of such high-cost natural gas,"17 however, FERC may grant the "tight formation" designation only in situations where it is satisfied that the incentive price is needed in order to make high-cost gas worth exploiting. See Pennzoil Co. v. FERC, 671 F.2d 119, 123-125, 127 (5th Cir. 1982).

Section 503 of the NGPA18 outlines the procedures for determining whether specific gas falls within a given category of gas entitled to incentive pricing. It is specifically to be used for "applying the definition of high-cost natural gas under section 107(c),"19 a responsibility that Congress divided between FERC and the state or federal "jurisdictional agency" that governs the drilling of wells on the particular site for which high-cost designation is requested. Unless the jurisdictional agency waives its role, in writing, it is to make the initial determination of whether specific gas satisfies the factual criteria for a particular category for incentive-priced gas.20 As the Conference Report clearly states, the "determination made by such State or Federal agency includes the subsidiary determinations required to be made to determine the category for which natural gas production qualifies."21

FERC reviews the jurisdictional agency's factual determinations to ensure that they are supported by "substantial evidence."22 Judicial review is subsequently available only if FERC reverses the jurisdictional agency's determinations; judicial review is not available if FERC upholds those determinations. See Mesa Petroleum Co. v. FERC, 688 F.2d 1014 (5th Cir. 1982). This distinction is embodied in sections 503(b)(4)and (c)(4) of the NGPA:23 the latter provision states that jurisdictional agency determinations "shall not be subject to judicial review under any Federal or State law except as provided in subsection

The formations in the case before us were on federal lands, and the jurisdictional agency was the Bureau of Land Management of the United States Department of the Interior. The BLM made the factual determinations necessary under Order No. 9926 and recommended that FERC grant the "tight formation" designations. Upon review, FERC found that those determinations were supported by substantial evidence.27 II.

MDU concedes that if section 503 governs the grant of "tight formation" designations in this case, then no appeal lies because FERC upheld the jurisdictional agency's recommendation. Nonetheless, all the parties (including FERC) contend that judicial review is authorized here because, they reason, FERC did not act under section 503 at all in granting the "tight formation" designations in question.28 They point out that in the rulemaking notices surrounding Order No. 99 FERC stated that it would make these case-by-case "tight formation" determinations not through the procedures of section 503 but rather through somewhat different procedures of its own devising,29 for which it claimed authority in its broad rulemaking powers under section 501 of the NGPA.30 Indeed, FERC purports to rely on Section 503 only in making the secondary determination of whether particular wells on a previously designated tight formation are entitled to incentive pricing (the basic question being the date on which the well was drilled).31 According to the parties, section 503 merely precludes judicial review of this well-specific determination when FERC agrees with the jurisdictional agency. They argue, though, that judicial review is available for FERC's granting of the initial "tight formation" designation, because section 506 of the NGPA32 authorizes review of section 501 rulemakings. The parties argue that MDU therefore may seek review in this court of the "tight formation" designations in dispute here, notwithstanding the fact that FERC found the determinations of the jurisdictional agency to be supported by substantial evidence. III.

As we have stated, it is undisputed that the NGPA precludes an aggrieved person from appealing the grant of a "high-cost natural gas" designation when, under section 503, FERC has affirmed the jurisdictional agency recommendation. Whether MDU may appeal the grant of the "tight formation" designations in this case therefore depends on whether FERC may avoid the statutory bar to judicial review by purporting to grant these designations through a section 501 rather than a section 503 rulemaking. We must therefore determine, under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984), whether FERC's interpretation of its rulemaking powers under the NGPA, insofar as it would permit judicial review of the "tight formation" designations at issue, conflicts with Congress' "unambiguously expressed intent," and if not, whether that interpretation is a "permissible construction" of sections 501 and 503.

It is rare for Congress' intent to be as "unambiguously expressed" as it is in this case. The Conference Report indicates that the House and Senate originally disagreed on the procedural framework for ...

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